Picking through the driftwood to see why it sunk…

Inflating Deficit Fears: Right-Wing Lies and Myths about the Current Inflation Spike

—–The US political scene is awash with deficit hawks issuing the clarion call of inflation. The rising price of food and oil is admittedly eating away at the living standards of the lower classes, also known as the majority of Americans, while other prices are more stable. The republicans and much of the economic elite are pointing a finger squarely at the federal government, claiming that the deficit and the Federal Reserve’s loose monetary policy is increasing the money supply in the US economy to hyperinflation levels. The logical extension of this argument is, of course, that the US government must cut spending, and the federal reserve must raise interest rates, halting attempts by the government to fix the economy and let it renew its “natural course”. This argument might seem persuasive at first: the government is printing more money, so the value of that money goes down, there causing prices to go up. A look at the actual data, however, shows that this argument is nothing more than a veil for another talking point against the government social security net, a distortion of the truth for political gain.

—–It is certainly true that the prices of some key goods in the US have risen. Headline inflation has risen to nearly 3% as of April, and food prices, if they continue at current rates, would increase almost 8% to as much as 20%, depending on who you ask, by this time next year. This is grim news for many Americans, particularly since the poorest 20% of us spend 44.1% of their income on food. However, the 3% number is what economists call headline inflation – presumably because it looks more shocking on newspaper headlines. The US government has a second number, known as core inflation – and that was only at 1.2% in March of this year! This low level of inflation is considered by some to be too low, in fact – many economist would like it to be higher. Once food and gasoline is excluded, the inflation disappears.

—–At this point the objection many quite fairly give is “so, who cares?” Food and gas are some of the most bought goods by middle and low income Americans, if they are going up in price it doesn’t matter if computer prices are going down. “I cant eat a iPad”, as it was said. Of course, rising food prices is horrible – but it isn’t inflation. Inflation is not the rising price of goods – its the falling price of the dollar. Think of the US dollar as a commodity just like any other. If the quantity of cars in the world doubled overnight, their price would go down – not just relative to the dollar, but also to other goods! Before I could get 10 computers for one car, now I could only get 5. Inflation is the same process happening to the dollar. If the dollars is actually suffering inflation, its price relative to all goods has to go down, meaning the price of all goods has to rise more or less equally. Today, given that only food and gas are increasing, that isn’t a problem with the US dollar – its a problem with gas and food. And the evidence bears this out. If the US dollar was weakening, why has gas in Europe, where they use the Euro, increased from €30 in 2008 to nearly €90 euros today? If the US dollar was weakening, why would food prices in England, which uses the pound, be increasingby 4.5% a month, an annual rate of over 50%? Once all the evidence is in the picture, its obvious – there is something wrong with the supply of food and oil, not the supply of US dollars. The sources of these problems are also obvious, with so much instability in the middle east and massive droughts in China and elsewhere. And until someone can explain to me how the US cutting spending on healthcare for the poor will lower the price of food in the United Kingdom, or how the Federal Reserve raising interest rates will somehow boost oil production in Saudi Arabia, any argument to change fiscal or monetary policy on the basis of these price increases is simply asinine.

—–There is one error in thinking that I believe many Americans may be making – given that we know the federal government’s deficit has increased so much, and the federal reserve is printing so much money, why hasn’t there been more inflation? If the supply of money is growing so fast, shouldn’t its value be collapsing, just like the value of cars? The answer is essentially “maybe”, because inflation is not simply the supply of money. Inflation is determined by what is often called the velocity of money. What that means is inflation is not caused by more money existing on a given day, it is caused by more money being spent on a given day on goods. If the government doubled the amount of US dollars in one day, but took that money and put in a vault underground, would it cause inflation? Of course not – as far as prices for food are concerned, that money doesn’t even exist! It isn’t being spent.

—–That is essentially what is happening today. All the money being printing by the government? Its going into treasury bonds, bought up by corporations, banks, and hedge funds, who we all know aren’t spending a dime. All this new money is going into financial products and saving accounts. It isn’t buying goods in the real world. While there are ways for investments like these to affect consumer goods prices – I wont say that government policy has had no affect at all on food prices – overall little of this money is entering the consumer markets. Which suggests that the government, far from decreasing spending, should be increasing spending massively, since our economy is still reeling, with no jobs and little growth, while inflation is not a concern at all.

—–The key thing about all this is that, honestly, this is common knowledge to those who study economics. Of course the average American does not and will not know this, but reporters and politicians, if they have any ounce of intelligence, should know this is how inflation works! Therefore, the calls by republicans and their elite allies to reign in “inflation” are either made out of idiocy or intentional duplicity. Honestly, I don’t see why a whole lot of both cant be the reason.